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Posted: February 5, 2015

Damages in Derivative Action Must go to Corporation, Not Plaintiff

On January 28, 2015, the Second Department issued a decision in Sakow v. Waldman, 2015 NY Slip Op. 00742, regarding the distribution of a damages award in a derivative action.

In Sakow, the plaintiff, who brought an action both individually and derivativly regarding the management of a real estate investment, prevailed at trial and was awarded damages on his claims. On appeal, the Second Department explained that damages on the derivative should have been awarded to the corporation, not the shareholder that brought the suit, explaining:

[The plaintiff, Sakow], both individually and derivatively on behalf of [the corporation,] Mawash, commenced this action, alleging that [the defendant,] Waldman had retained all of the net income derived from the operation of both apartment buildings without accounting therefor to Mawash or to Sakow, and had pledged or caused Mawash to pledge the two properties as collateral security for a number of loans, with Waldman allocating the proceeds of the loans to his own benefit. The matter proceeded to a nonjury trial. After concluding that Sakow was individually entitled to 50% of the $6,679,958, or $3,339,979, in net income and loan proceeds that related to the 10th Street property, and 25% of the $5,122,388, or $1,280,597, in net income and loan proceeds that related to the 25th Street property, the Supreme Court awarded a judgment to Sakow, individually, in the principal amount of $4,620,576, or $3,339,979 plus $1,280,597, and awarded $0 to Mawash.

A shareholder of a corporation, even of a closely held corporation, may not recover in his or her individual capacity for wrongs committed against the corporation, and any recovery obtained pursuant to a derivative cause of action asserted by a shareholder is obtained for the benefit of the injured corporation. Thus, as Mawash correctly contends on appeal, instead of awarding 25% of the $5,122,388 in net income and loan proceeds relating to the 25th Street property directly to Sakow, individually, and nothing to it, the Supreme Court should have instead awarded 100% of this amount to Mawash, on whose behalf Sakow sued derivatively. Accordingly, we modify the judgment by, among other things, reducing the amount awarded to Sakow, individually, from the principal sum of $4,620,576 to the principal sum of $3,339,979, representing a reduction in the sum of $1,280,597, and adding a provision thereto in favor of Mawash and against Waldman in the principal sum of $5,122,388.

Given the context in which derivative actions usually take place, it is easy for a plaintiff to forget that it is bringing suit on behalf of the corporation and that any award of damages goes to the corporation, not the plaintiff.

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